Using Insured Deposits to Refine Estimates of the Large Bank Funding Advantage

Abstract

The extraordinary government support for financial institutions during the financial crisis of 2007 to 2009 heightened interest in how much the perception that governments will bail out the largest institutions affects their funding costs. However, it is hard to separate the effects on funding costs of being a very large financial institution from the effects of a perceived too-big-to-fail policy. Previous researchers have employed varying identification strategies that have produced wide-ranging estimates of the funding cost advantage of large banks. This paper shows that a size-based funding advantage is present in fully insured small time deposits, even though it is very unlikely to be related to perceptions of an implicit too-big-to-fail policy. In studying other deposit products, it then uses that information to account for various unobserved characteristics that re- searchers have pointed to as confounding previous estimates. Using this strategy, the funding cost advantages at very large banks relative to their large regional bank competitors in small time deposits and liquid deposits, which together account for about half of large bank funding on average over the sample period, are often statistically insignificant. Differences in the average maturity of small time deposits and prevalence of insured liabilities in funding the two groups of banks are also small.